BRICS bank: a good idea that can do grave harm

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Andy Mukherjee

SINGAPORE, June 6 (Reuters Breakingviews) – Brazil, Russia, India, China and South Africa want to clone the World Bank. It’s one of those worthwhile initiatives that can end up causing harm.

While the proposed BRICS Bank could help ease the $1.4 trillion-a-year infrastructure financing gap in developing nations, the new institution’s backers might be tempted to use it to further their own economic and foreign policy objectives. That could open the doors wide for projects that are social and environmental disasters.

The five sponsor countries seem serious enough. They will agree to pony up a total of $10 billion in cash and another $40 billion in sovereign guarantees to capitalize the new lender when their leaders meet at a BRICS summit in Brazil in July, Reuters reported on May 30.

In two years, the BRICS Bank’s capital is expected to double to $100 billion, giving it a total lending capacity of $350 billion over time. That would make it a more important infrastructure financier than today’s World Bank, according to a recent United Nations discussion paper.

Infrastructure could use a new moneybag. Currently, 60 percent of the financing for these projects in developing countries comes out of stretched national budgets. That’s why investment is often inadequate. Besides, the World Bank’s focus is shifting to healthcare and poverty alleviation.

China Development Bank and China Exim Bank have stepped into the breach – sometimes offering 20-year-plus infrastructure loans at heavily subsidised 2 percent annual interest rates. But their funding to sub-Saharan Africa and Latin America is largely aimed at securing China’s energy supplies and winning more business for Chinese vendors.

That creates an opportunity for a new type of development bank: one that can tap China’s economic clout to make reasonably priced long-term loans, but isn’t entirely under Beijing’s thumb. Unlike the Chinese policy lenders, the BRICS Bank will have to at least earn its cost of capital. That shouldn’t pose much of a problem if the sponsor nations buy its bonds for their foreign reserves. The bank’s backing for a project could also attract other investors. Later, the lender may spawn its own equity-financing arm.

But there are pitfalls. New money is most urgently needed in the power industry, where the ecological dilemmas are trickiest. The World Bank’s commitment to clean energy has come under a cloud following its decision to fund a heavily polluting, lignite-based plant in Kosovo. The BRICS Bank will face an even knottier challenge. Its emerging market sponsors have little in common apart from a shared distrust of Washington-based institutions. To define a vision, the new bank will need a strong board, which is able to resist political jostling by its sponsor nations when making staffing and lending decisions. Independent governance, though, is not a given, since it’s not even clear where the institution will be based or who will run it. The bank may accept small equity contributions from other countries. But at this stage, the BRICS nations aren’t looking to launch a truly open, global institution.

That’s not ideal. Too much proximity to any one of the five governments will create a credibility deficit. Too much infighting will slow down decision-making. Aping the leadership model of the International Monetary Fund, which has historically had a European managing director, and the World Bank, whose president is always American, will also be a mistake in the long run.

Short-termism could hobble the bank in other ways, too. The governments of borrowing nations will expect money with no or few conditions. They will be especially keen to avoid scrutiny of how they deal with their own people. If a powerful international lender acquiesces, there’s a risk that countries will again start building the large dams that the World Bank once funded but is now reluctant to support because of the massive human displacement they cause.

The new financier’s ambitious backers have made a commitment to sustainable development. Shorn of robust operational guidelines, the pledge is just a homily. It will be a shame if a much-needed new source of patient, long-term capital comes to be seen by local communities in poor nations as a new exploiter.

CONTEXT NEWS

– Leaders of Brazil, Russia, India, China and South Africa are expected to sign a treaty to launch a new development bank when they meet at a BRICS summit in the northern Brazilian city of Fortaleza on July 15, Reuters reported on May 30.

– The BRICS Bank will have start-up capital of $50 billion, of which the five nations will put in a total of $10 billion in cash and $40 billion in guarantees, the Reuters report said. The bank’s capital will double in five years. The new lender will back emerging-market projects that are currently unable to attract finance from multilateral agencies such as the World Bank.

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About bambooinnovatorKB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund.
Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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